Commonwealth, state and territory governments must overhaul the justice system to reduce the massive over-representation of Indigenous people in jail, a major inquiry has found.

Key points:

Inquiry recommends end to practice of jailing people for unpaid fines

Courts should consider First Nations peoples' systemic and background factors

Governments should set criminal justice targets to reduce incarceration, violence

Advocacy group says the inquiry provides a 'once in a generations' chance

The Australian Law Reform Commission (ALRC) inquiry, led by federal court judge Matthew Myers, was commissioned by the Federal Government to investigate whether courts, police and prisons were contributing to the over-incarceration of First Nations people.

The answer was yes, the inquiry found, because the justice system was often entrenching inequalities by not providing enough sentencing options and diversion programs for Indigenous offenders.

Shahleena Musk, a Larrikia woman and senior lawyer with the Human Rights Law Centre, said it was one of the most "crucial" inquiries she had seen.

"We're not going to give up on this," she said.

"This is about saving lives and saving communities, and we can't allow this to continue — it will become a crisis."

"The evidence is all there that governments must act now and ensure that these recommendations are implemented."

Keenan Mundine, who had a troubled childhood growing up in Redfern in Sydney, said he encountered a discriminatory legal system when he was sent to youth detention as a teenager.

"I fell through a lot of gaps in the justice system and dealt with a lot injustices, a lot of policies that were made by non-Indigenous people that affected me as an Indigenous person," he said.

"As a person who didn't have much family support, most of the structures in the criminal justice system are set up for people who have a lot of support, a lot of community support."

Law Council chief executive Morry Bailes said the inquiry's recommendations were "compelling" and "must not be shelved like those from the 1991 Royal Commission into Aboriginal Deaths in Custody report".

Indigenous advocacy group Change the Record said the inquiry was a "once in a generation" chance to reduce the soaring rate of Indigenous incarceration, while the NSW Aboriginal Land Council said it was a "damning indictment of a system that is broken".

But the Institute of Public Affairs said that while it supported some of the inquiry's recommendations, it was troubled by suggestions that some laws should treat Aboriginal and Torres Strait Islander people differently.

"An idea coming out of this report that we should have a parallel system of justice alongside the system of justice that's used in Australia on the basis of race, I think that's a very concerning proposal ," the institute's policy director Simon Breheny said.

The ALRC inquiry also pushed for wide-ranging changes to police protocols, so Indigenous Australians are not unfairly targeted by law enforcement.

"Commonwealth, state and territory governments should review police procedures and practices so that the law is enforced fairly, equally and without discrimination with respect to Aboriginal and Torres Strait Islander peoples," the report said.

A person's Aboriginality should be considered during bail and sentencing decisions, the inquiry said.

Indigenous sentencing courts pitched

Aboriginal and Torres Strait Islander women and men make up 27 per cent of the Australian prison population, costing the nation about $3.9 billion per year, the ALRC said.

"Over-representation is both a persistent and growing problem — Aboriginal and Torres Strait Islander incarceration rates increased 41 per cent between 2006 and 2016."

"There has to be a change because we just cannot continue to lock up the First Nations people at the rates at which we do," Labor senator Pat Dodson said.

The year-long inquiry received 120 submissions and was informed by a committee of Australia's pre-eminent Indigenous legal minds.

Criminal justice targets should be set by governments to reduce rate of incarceration, and rates of violence, the commission found.

The inquiry also recommends an independent justice reinvestment body be established to divert money away from the criminal justice system and into trials in local areas to drive down high rates of offending.

"Commonwealth, state and territory governments should support justice reinvestment trials initiated in partnership with Aboriginal and Torres Strait Islander communities."

The report said irregular employment, previous convictions for often low-level offending, and a lack of secure housing was disadvantaging some Indigenous people when they applied for bail.

But the inquiry found that magistrates and judges faced a shortage of community-based sentencing options for Aboriginal and Torres Strait Islander offenders, and said state and territories should establish specialist Indigenous sentencing courts.